Natural savers emerged from the dark ages of late to revel in annual yields often higher than 5%.
Not long ago, even competitive high-yield savings accounts paid many percentage points lower than inflation. So your purchasing power was shrinking at even the best high-yield savings accounts.
That’s no longer the case. The U.S. Consumer Price Index (CPI), which the government uses as the official inflation number, currently sits at 3.2%. It’s trending down over time, although much more slowly now. The Fed often mentions that it targets 2% inflation.
So if you can get 5% interest, you’re outrunning inflation by almost 2%.
However, the elevated interest rates aren’t limited to savings accounts. CDs, Series I savings bonds and money market accounts have gone through periods of attractive rates as well.
Relative boom times have caused savers to evaluate and re-evaluate their options. For example, is a money market account as safe as a high-yield savings account?
Is a Money Market Account As Safe as a High-Yield Savings Account?
I’m considering a money market account for my savings. Is it as safe as a savings account at a bank?
That’s what a listener recently asked Clark.
Asked Ed in California: “I’m planning to move my savings from a monster mega bank to a high-yield online bank. But I see Fidelity is offering 4.98% on its money market account.
“I would like to move the money to Fidelity since I already have an account there even though I could get slightly more at a high-yield online savings account. Is their money market account as safe as a high-yield account?”
Money market funds are not covered by FDIC insurance. Earlier this year, the collapse of the Silicon Valley Bank among others caused the public to re-examine what it means to have FDIC insurance. If you’re putting money into an account backed by FDIC, typically your money is safe up to $250,000 — even if the bank goes out of business or suddenly implodes.
A money market fund invests in short-term, high-quality debt. According to Clark, though, money market funds at Fidelity, Schwab and Vanguard that invest in U.S. Treasuries offer “superior” protection to FDIC insurance.
“Money market accounts are very safe,” Clark says. The chance of doing what they call break the buck is so remote. And there’s so much attention by the Federal Reserve and other regulators on this issue, I’m not freaked out about it.”
What Does ‘Breaking the Buck’ Mean for a Money Market Account?
The share price of a money market fund is designed to stay at $1. When the fund’s income isn’t enough to cover expenses or investment losses, like in 1994 or 2008, the price can fall below $1. This is called “breaking the buck,” and it’s bad news for investors.
However, those previous incidents led to stricter government regulations. Now, it would take something like a nuclear war for it to happen again, Clark says. That’s why he feels safe to put his own money in money market funds.
“I sleep well at night knowing that these obligations are ultra short term and I’m not worried about them breaking the buck,” Clark says.
Consider CDs Instead of Money Market Funds
For Ed, getting 4.98% instead of perhaps 5.3% is worth it. Especially since he already has a Fidelity account and doesn’t need to fiddle with a new username and login.
However, Clark thinks that we’ve reached peak interest rates. The prediction markets agree, suggesting that it’s likely that the Fed will cut rates, particularly in the second half of 2024.
In that case, Ed may want to look at CDs. Clark loves for people to buy CDs via Fidelity, Schwab and Vanguard. So that would maintain Ed’s desire to avoid unnecessary hassle. And it may also get him more yield for a longer period.
“I think we’re nearing a peak on interest rates on savings. And if there’s money that you can put aside that is not for potential immediate needs, I’d rather see you put it into CDs of longer duration,” Clark says.
“As long as it’s comfortable for you, you could even ladder CDs. The money that you don’t need to have immediate access to. Because the rates on CDs are [so attractive] right now. And those are FDIC insured. And you can buy those through Fidelity Investments.”
Final Thoughts
Money market accounts aren’t FDIC insured. But they are incredibly safe. That’s especially true if you buy money market funds focused on reliable U.S. government debt from Fidelity, Schwab and Vanguard, Clark says.
However, interest rates likely are peaking. If you’ve got savings that you can put aside for a considerable period, you may consider long-term CDs so that you can lock in a great yield for years to come.
